Sovereignty, Russian Law and Self-Identification of Business

Recently, the question of why some Russian businessmen prefer resolving disputes abroad and why Russian law is not popular went beyond the narrow corridors of the legal community and began attracting the attention of the higher authorities. Public remarks of senior officials about litigations in London and the recent meeting of the chairman of the State Duma S. Naryshkin with legal professionals on the matter are evidence to this.

In June of this year, D. Afanasyev, the managing partner of the law firm EPAM, published an article in Vedomosti ‘10% of Sovereignty’ (June 27, 2012, № 117 (3131)) in which he argued that the majority of Russian companies do not trust Russian law and refer to it no more than 10% of significant transactions. These, he pointed out, were the results of his firm’s survey, and according to the survey, from the legal point of view the Russian economy has actually abandoned the jurisdiction of the Russian Federation.

According to him, ‘if we take into consideration one of the primary elements of sovereignty, the country’s ability to regulate transactions taking place on its territory, Russia long ago de facto has lost a part of it. Bearing in mind some of the deals in Siberia, subjected to English law, it is permissible to use this metaphor: the direction of Siberian rivers is determined by English judges and English lawyers argue the matter. This situation is alarming from all points of view, and especially from the perspective of the state: the application of foreign law to transactions in Russia is a real threat to national security’.

Accordingly, ‘among the main reasons for the low demand for the Russian law are overly prescriptive approach of the Russian civil law to the relations between businessmen and the high risk of a transaction being declared void, the lack of effective implementation of agreements and the lack of effective protection of the interests of the parties when these agreements are breached.’

In light of this, we decided to look at the problem from a new angle, specifically, in terms of the practice of a well-known court: which law the parties chose in disputes before the International Commercial Arbitration Court at the Chamber of the Russian Federation. This court, established 80 years ago, is no less well-known in Russia than arbitration in London, Paris, Stockholm, and it considers various disputes involving foreign parties. The vast majority of cases heard by the ICAC include an international aspect and affect Russian business.

The survey has shown that in most cases resolved by ICAC the substantive law was Russian. The practice of the court does not confirm the marginality of the Russian law but proves the opposite trend.

Thus, in 2011 the ICAC has made 213 awards and judgments. Of these cases, the parties chose the Russian law in 151 cases, which is 71% of all cases. Foreign law was chosen only in 10 cases (4.7% of all cases), including the laws of Holland, Germany, Cyprus, Ukraine and Uzbekistan. In other cases the parties did not choose the applicable law and it was determined by the court.

The statistics is not accidental as it is confirmed by data for other years. Thus, in 2010 there were 209 decisions and judgements of the ICAC. Russian law was elected in 141 cases which amounts to 67% of the total number. Foreign law was chosen in six cases, which is 2.8% of the total number of cases (including the laws of England, Sweden, Ukraine and Kazakhstan). Without overloading the reader with statistics, it is suffice to mention that in 2009 the parties chose Russian law in 74% of the total number of cases.

Thus, we can see that Russian companies referring to the ICAC prefer to subject their contracts to Russian law. Moreover, we should take into account the fact that by the number of international disputes involving Russian business the ICAC leads not only in comparison with other arbitration institutions or foreign courts but also in comparison with state commercial courts. We should also take into account the wide variety of commercial matters and disputes referred to the ICAC. In 2011, the court considered disputes arising from contracts of supply and construction agreements, contracts for services, international financial leasing, loans, agreements of purchase and sale of shares, transfer of shares, freight forwarding, warranties, leases, loan agreements, contracts for the purchase of non-exclusive rights, the right to use software products for the construction and delivery of vessels and etc. The methodology used was very simple: we looked at what law was applied in a particular case. It is hardly possible to challenge the reliability of the results.

We are not aware of the methodology used by EPAM in the course of their study (the results of any survey, as is well known, depend on the wording of the questions). However, we dare to suggest that this survey is not representative of the Russian business as a whole but is focused on its top sector.

Certainly, it is important to know the behaviour models of business leaders but to extrapolate such model is hardly a good idea. Of course, you cannot dispute that over 50% of cases considered by the ICAC arise from foreign sales contracts with an average value of several million U.S. dollars, while the EPAM’s survey speaks about the choice of law in large corporate and financial transactions for tens and hundreds of millions of dollars.

Again, the information about law chosen in such big deals is very useful, but generalisation in respect of the Russian business as a whole must be done with extreme care.

As is known, it would be better for Russia if the foundation of its economy was comprised by small and medium companies and not by the largest conglomerates as is the case now. And yet, as the ICAC’s practice shows the medium business prefers the Russian law, insist on its use in transactions and does so successfully.

This fact in the light of the necessity for de-monopolization of the Russian economy and the role of small and medium-sized businesses in the Russian legal system is very gratifying for the future. It turns out that this business does not follow the model of the largest players, which remains confined to the later.

So, the issue with the usage of the Russian law is not that clear as the said survey suggests. Its findings indicate trends in the top sector including, unfortunately, state corporations. Does this mean that we should not struggle for the expansion of the Russian law there? Of course not. Therefore, the survey is a step in the right direction.

The state is not fighting against the growing ranks of Russian business aristocracy going offshore

Finally, we cannot agree with the troubling assumption of D. Afanasyev’s article that Russia has long ago lost a part of its sovereignty in respect of large business transactions. We think that it would be correct to put it differently: not lost but abandoned it consciously, and did so for the time being. EPAM, which emphasizes its proximity to the higher realms of the Russian politics and business, became successful in part because of this proximity. So it should know better.

To any objective observer, it is obvious that the subjection of large transactions to foreign law is caused by the fact that for the long time a large part of Russian business has remained offshore. At the same time, the state has not been fighting against the growing ranks of Russian business aristocracy going offshore but rather supported it. There are several factors on play here, including the underlying distrust to Russian courts and the merge of bureaucracy and business and a number of other explanations that require further analysis. But overall the major factor is that the government deliberately does not encumber or interfere with the economy going offshore. Nor does it prevent the submission of large transactions to foreign law.

It is likely that the government believes that it is easier to let the business to have as much of foreign law as it wants in order to enrich itself and then on that basis to evolve in the direction of social responsibility and the support of the Russian geopolitical interests including the support of Russian law. Control can bring nothing good (the officials cannot cope with meticulous work, but corruption increases), while self-improvement and national self-identification of business, even through offshores, is quite possible, though not quick, and brings less risk of corruption.

I must admit that there is a certain economic logic to this policy: business should grow up on its own. This is a long-term strategy. At first it was followed out of necessity but today the policy seems risky and unbalanced, yet the government, it appears, follows it intentionally.

Thus, if anything must be openly discussed by lawyers working with big business, it is this policy no matter how uncomfortable it may be, and not the loss of sovereignty by 10% in respect of the application the Russian law to large business transactions.

Dr. A.N. Zhiltsov
Professor of the Russian School of Private Law, Member of the Presidium of ICAC.

Dr. A.I. Muranov
Associate Professor of MGIMO, arbiter of ICAC
Managing Partner of Muranov, Chernyakov & Partners.